Investors Await NFP for Clues on Fed's Path

Investors are waiting to see if the recent signs of weakness in the labour market will show in the NFP figures and justify expectations that the Fed has run out of tightening.

Building the Data

After Fed Chair Jerome Powell made it clear in his Jackson Hole speech last week, the Fed will be very carefully looking at the data as it cautiously approaches the potential for another rate hike. Investors will be keen on the first two significant data points before the next Fed meeting in September. Friday's NFP will be followed by August CPI figures released next week, which could form the expectations for the FOMC meeting. There is near-unanimity among traders that the Fed won't hike at the next meeting, which could extend to subsequent meetings if the data is weaker. But the consensus could become shakier if there is another surprise with the labour figures.

Last month's NFP already showed that hiring was starting to slow down, which was made even clearer earlier this week in the release of JOLTS figures that shocked the market by coming in 600K below estimates. The fourth consecutive drop indicated that almost 1.5M job offers had disappeared in four months. The weakness in the labour market helped boost risk appetite, as it was seen as the signal that the Fed is looking to start easing up on the rate hikes. Markets could move substantially towards more risk appetite if the jobs numbers miss, but that could also bring back worries about a recession that might worry traders about long-term growth.

What's on the Docket

The consensus is that the US added 170K jobs this month, down from the 187K in July. The unemployment rate is forecasted to remain steady at 3.5%. Average hourly earnings are expected to show an annual growth of 4.4%, which could get in the way of the narrative that hopes the Fed is done with the rate hikes. Wages increasing at over twice the target inflation rate might put upward pressure on consumer prices and keep the Fed inclined towards another hike. Therefore, a drop in this data point might be greeted with more enthusiasm by the market than other indicators.

With an active Fed, the "bad news is good news" for the markets narrative seems to be in place. Markets could be encouraged that the Fed's tightening campaign is working, easing tightness in the labour market, but still avoiding a hard landing if NFP stays above the replacement rate of 90K/month. Markets will also likely factor in that prior NFP figures will be revised lower once again, which has been the theme all year.

Dow Jones in H&S?

Wall Street's price action resembles a head-and-shoulders pattern, with the right shoulder expected to head towards 35500 to complete. Breaking past the upper neckline could bolster the index to fresh highs for the year, pending a surge past 35845. If momentum wanes, the right-shoulder pick may be already in, paving the way to 34k. Interim support under 34900  would lie at 34740.

Source: SpreadEx / Wall Street

Key Takeaways

Investors will watch the NFP figures closely to gauge the labour market's strength and determine if the Fed will continue tightening. Recent data has shown signs of weakness in hiring, with job offers decreasing over the past four months. The consensus expectation is that the US added 170K jobs this month, with the unemployment rate remaining at 3.5%. Average hourly earnings are expected to show annual growth of 4.4%, which could impact the Fed's decision on rate hikes. Markets may view a drop in average hourly earnings as positive, signalling a potential easing of rate hikes.